Banks' non-performing loans to peak in Q4

Even as banks across the GCC are announcing a decline in their second quarter earnings on higher provisioning for bad debt, non-performing loans (NPLs) will not peak in this quarter, but be fully reflected only by the last quarter of this year, believe analysts.

"It usually takes six to eight quarters for NPLs to peak on the banks' books. It shouldn't be different this time," Mohamad Hawa, Head Mena Equity Strategy and Financials, Credit Suisse, told Emirates Business.

"For one, some banks treat a loan as non-performing only if there is a 180-day default – that's six months," he said, adding that since the financial crisis started manifesting itself in the region in September 2008, there may still be a few quarters of "good" results before the full impact is known. "This quarter [Q2] will probably be the first where we start seeing some real NPL numbers. But it wouldn't be the peak. We are expecting crystallisation of bad loans to accelerate in the next few quarters, especially for those banks that have lower excess provisioning," he said.

In a preview of Q2 earnings of Mena banks, Credit Suisse expects a strong set of revenues with strong margins across the GCC, enhanced by low single-digit loan growth in the UAE and Qatar.

"All in all, we expect collective credit costs to increase across the region, but this should be more than offset by widening margins during the quarter. As for specific credit costs against exposure to the Algosaibi and Saad groups, we agree with the wider belief in the market that banks will await directions from the central banks on the issue," it said.

"UAE banks have not yet disclosed detailed exposures to Algosaibi and Al Saad groups although the Central Bank is aware of the situation," according to Deepak Tolani, Equity Research Analyst at Al Mal Capital. "We believe the impact this quarter will be small and related charges to the reserves and NPLs will probably not be seen until the second half of the year, As a derivative effect, the health of large regional family conglomerates that were previously considered stable are now being called into question."

The UAE Central Bank has asked banks to come clean on their exposure to the two troubled Saudi conglomerates although it does not expect to have to bail any out.

In Saudi Arabia, however, Credit Suisse expects flattish to slightly negative growth in the loan books. "We are also looking for consumer lending to have outperformed the corporate segment, hence Al Rajhi Bank and Riyad Bank should be relatively better positioned vis-à-vis corporate franchises," it said.

Since the last quarter of 2008, the economic environment across the world and in the Gulf has been characterised by unprecedented volatility and uncertainity.

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